Understanding GARP Stock Investing

There are many strategies that investors employ in order to make good stock investments. The strategies may depend on an investor’s tolerance of risk. Regardless of that, any type of stock investment strategy would work well depending on certain market conditions as well as how the investor takes advantage of it. One such strategy that investors may employ is the GARP stock investing strategy.

What is GARP?

GARP is short for “growth at a reasonable price”. It is actually a type of stock picking strategy that enables the investor to pick out stocks with potential. GARP stock investing is actually a combination of both growth and value investing. It is sometimes a misunderstood stock investing strategy with many investors developing certain misconceptions about it.

GARP Investing Aim

The primary aim of GARP investing is to determine those stocks that are a bit undervalued but may be expected to provide solid earnings in the future. Since it is a combination of both value and growth investing, those investors that are strictly following only either of the two investing strategies can get confused with GARP.

GARP’s Growth Investing Component

Since it is somewhat a hybrid stock investment strategy, GARP investors usually borrow from strategies employed by growth and value investors up to a certain extent. Just like growth investors, those who use the GARP strategy are concerned with the growth prospects of certain companies. They like to see positive earnings along with healthy and positive growth projections n the coming years.

But while growth investors usually find growth estimations within the 20 to 50 percent range quite normal, GARP investors can be quite skeptical over such high expectations. They usually just consider those companies with growth estimates that are within the safer and more achievable10 to 20 percent range.

GARP’s Value Investing Component

In terms of value investing, GARP investors like to look at a company’s low price-to-book ratio. Just like value investors, GARP investors like to look at companies with P/B that’s below the industry average. And in the same manner, companies with low price-to-earnings ratios are also considered as one of the factors in picking value stocks, opposite of a growth investor’s penchant for higher P/E ratios. Low P/B and P/E ratios as ideal investing criteria make GARP investing somewhat similar to certain value investing strategies.
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